1. This is an appeal filed by the assessee against the order of learned Commissioner of Income-tax, Moradabad dated 30-3-2005 for assessment year 2001-02, in the matter of order passed under Section 263 of the Income Tax Act.
(1) That on that facts and circumstances of the case and in law the order dated 30-3-2005 passed by the learned Commissioner of Income-tax, Moradabad (CIT) under Section 263 of the Income Tax Act, 1961 ('the Act') is beyond jurisdiction, bad in law and void ab initio.
(1.1) That the CIT erred on facts and in law in exercising revisionary powers under Section 263 holding that the assessment order dated 31-3-2003 passed under Section 143(3)(0 of the Act was erroneous and prejudicial to the interests of the revenue without assuming proper jurisdiction and without satisfying the prerequisite conditions of that section.
(1.2) That the CIT erred on facts and in law and exceeded his jurisdiction in excessive allowance of deduction under Section 80HHC without appreciating that examination of claim of deduction under the latter section was beyond the scope of assessment order dated 31-3-2003 passed under Section 143(3)(i) of the Act.
(1.3.) That the CIT erred on facts and in law in not appreciating that the assessment order was passed after detailed examination/enquiries and proper application of mind by the assessing officer and exceeded his jurisdiction in revising the assessment order dated 31-3-2003, by " substituting his opinion with that of the assessing officer, which is not permissible in law.
(1.4.) That the CIT erred on facts and in law and exceeded his jurisdiction in exercising revisionary powers under Section 263 of the Act in respect of issue other than the issues stated in the show-cause notice dated 18-1-2005.
1.5. That the CIT erred on facts and in law and exceeded his jurisdiction by making fishing and roaming enquiries subsequent to the notice under Section 263 of Income Tax Act which is not permissible in law.
(2) That without prejudice, the CIT erred on facts and in law and exceeded his jurisdiction in cancelling the entire assessment order and directing the assessing officer to make de novo assessment.
(3) That the CIT erred on facts and in law in determining deduction admissible to the appellant under Section 80-IB of the Act at Nil as against deduction of Rs. 4,37,602 claimed by the appellant.
(3.1) That the CIT erred on facts and in law in holding that Duty Draw back and Subsidy from DIC are not eligible for deduction under Section 80-IB of the Act.
(3.2) That the CIT erred on facts and in law in holding that deduction under Section 80-IB of the Act is not admissible on FDR interest amounting Rs. 18,784.
(4) That he CIT erred on facts and in law in determining deduction admissible to the appellant under Section 80HHC of the Act at M7 against deduction of Rs. 13,12,805 claimed by the appellant.
(4.1) That the CIT erred on facts and in law in holding that the appellant was not entitled to deduction under Section 80HHC of the Act in view of there being loss under Clause (d) of Sub-section (3) of that section, without appreciating that deduction was allowable independently with reference to export incentives in terms of proviso to Sub-section (3), ignoring the loss determined under Clause (a) of Sub-section (3) of that section.
(4.2) Without prejudice to ground No. 4.1 above, that the CIT erred on facts and in law in holding that the appellant was not entitled to deduction under Section 80HHC Act in view of there being loss under Clause (a) of Sub-section (3) of that section without appreciating that in any case deduction under the above section was admissible in respect of amount arrived at after setting off the loss on export of manufactured goods against the amount determined under proviso to Sub-section (3) of that section.
(4.3) That the CIT erred on facts and in law in holding that the subsidy from DIC is to be excluded while computing from 'profit of the business' in terms of Explanation (baa) to Section 80HHC of the Act as the same does not constitute profit derived from export.
(4.4) That the CIT erred on facts and in law in holding that interest on FDR's is to be excluded while computing 'profit of the business' in terms of Explanation (baa) to Section 80HHC of the Act as the same does not constitute profits derived from export.
(4.5) That the CIT erred on facts and in law in holding that for computing allowable deduction under Section 80HHC, eligible profits of the business have to be reduced by the amount of deduction allowed under Section 80-IB of the Act.
The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing.
3. Rival contentions have been heard and records perused. Facts in brief are that assessee-company being an industrial undertaking was also engaged in the export. The claim of the assessee under Sections 80HHC and 80-IB was allowed by the assessing officer on very same amount as claimed by it, while framing assessment under Section 143(3).
Thereafter the learned CIT issued notice under Section 263, wherein it was alleged that assessing officer has not correctly allowed deduction under Section 80HHC with reference to incentives received by the assessee in the form of excise duty and DEPB. The learned CIT found that after excluding 9096 incentive received by the assessee, their remains to be a loss, therefore, assessing officer was not justified in allowing deduction under Section 80HHC. He also found that while computing deduction under Section 80HHC assessing officer should have reduced the amount of deduction allowable under Section 80-IB, from the eligible profit, and only on the reduced profit deduction under Section 80HHC should have been computed. He further found that duty drawback was not eligible for deduction under Sections 80-IB and 80HHC. Thus learned CIT held that order of the assessing officer was erroneous insofar as prejudicial to the interest of the revenue. He, therefore, directed the assessing officer to make fresh assessment de novo after providing reasonable opportunity of hearing to the assessee. Aggrieved by this order of learned Commissioner (Appeals) dated 30-3-2005, the assessee is before us. It was argued by the ld. AR, Shri Rupesh Jain that admissibility of duty drawback for deduction under Section 80-IB is covered by the decision of ITAT Delhi Bench in the case of Ajit Gupta v. ITO (IT Appeal Nos. 2993 and 2994 (Delhi) of 2004 vide order dated 15-1-2007). He further submitted that admissibility on subsidy from DIC for deduction under Sections 80-IB and 80HHC are also covered by the decision of Hon'ble Calcutta High Court in the case of Sarda Plywood Industries Ltd. v. CIT . He also referred some more decisions in his A support. Shri Rupesh Jain further contended that admissibility of interest on FDR for deduction under Section 80-IB is also covered by the ITAT Delhi Bench in case of DLF Power Ltd (IT Appeal No. 1195 (Delhi) of 2002) and in case of Bharat Rasayan Ltd. (IT Appeal No. 4640 (Delhi) of 2000). As per Shri Jain, learned CIT was not justified in directing the assessing officer not to allow deduction in respect of incentives received by the assessee in view of the insertion of 5th Proviso to Section 80HHC(iii) with retrospective effect from 1-4-1992. For simultaneous deduction under Sections 80-IB and 80HHC, he relied on the decision of Ajit Gupta's case (supra).
4. On the other hand, ld. DR Shri Rajnish Kumar relied on the findings recorded by the learned CIT in his order under Section 263. He relied on decision of Madras High Court in case of CIT v. Chidambaram Construction Co. in support of the proposition that even the summary assessment can be revised under Section 263.
5. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberate on the case laws cited by the ld. AR & ld. DR during the course of hearing before us, as well as case laws discussed by the learned CIT in his order under Section 263. There is no dispute to the well-settled legal proposition that before exercising powers under Section 263, the learned CIT has to satisfy two conditions simultaneously to the effect that order of the assessing officer was d erroneous and a prejudice has been caused to the revenue because of such erroneous order. Only when both these conditions are being satisfied the learned CIT can validly exercise his powers of revision under Section 263. A bare reading of provisions of Section 263 makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it, is that the order of the Income Tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Income Tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to Section 263(1). There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the assessing officer. An incorrect: assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue' is not. an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the; Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainty be prejudicial to the interests of the revenue. The phrase 'prejudicial to the interest of the revenue' has to be read in connection with an erroneous order passed by the Assessing Officer.
Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by the Income Tax Officer is unsustainable in law.
6. The power of suo motu revision under Sub-section (1) of Section 263 is in the nature of supervisory jurisdiction and the same can be exercised only if both the circumstances specified therein exist viz- (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. An order cannot be termed as erroneous unless it is not in accordance with law. If an Income Tax Officer acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualize a case of substitution of judgment of the Commissioner for that of the Income Tax Officer, who passed the order, unless the decision is held to be erroneous. In the instant case while allowing claim of deduction under Section 80HHC and 80-IA, the assessing officer at some instances discussed herein below, has applied incorrect application of law which has rendered his order erroneous and resulted in loss of revenue. Let us now examine each and every action of the assessing officer and consequential direction given by Id. CIT, in view of our above observations.
7. In the instant case the learned CIT has condemned the action of assessing officer for allowing deduction under Section 80HHC without reducing therefrom the deduction allowable under Section 80-IB in view of provi sions of Section 80-IB( 13). By relying on the decision of ITAT in case of Ajit Gupta (supra), ld. AR submitted that the import of the restriction provided under Sub-section (9) is to ensure that the assessee does not claim repetitive deductions under Chapter VI-A with respect to same profits and gains of the undertaking in question.
8. We have considered the rival contentions, Sub-section (9), Section 80- IA/80-IB(13) clearly provide that where an assessee claimed and allowed deduction on the amount of profit and gains of industrial undertaking under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter V-IA. ITAT Special Bench (Chennai) recently decided the issue in the case of Rogini Garments (IT Appeal Nos. 963 (Mad.) of 2005 and 1518 (Mad.) of 2006 vide order dated 27-4-2007) in favour of the revenue, holding that relief under Section 80-IA should be deducted from the profits and gains of the business before computing relief under Section 80HHC of the Act. Respectfully following the same the action of the CIT for directing the assessing officer to allow deduction under Section 80HHC on the eligible profit after r educting the deduction allowable under Section 80-IB, cannot be interfered.
9. With regard to learned CIT action for not allowing deduction with reference to the incentive received by the assessee and claimed under Proviso to Section 80HHC(3) we found that because of the insertion of 5th Proviso to Section 80HHC(3) by Taxation Laws (Amendment) Act, 2005, with retrospective effect from 1-4-1992 the assessee cannot be declined deduction. g The said amendment has now been introduced by Taxation Laws (Amendment) Act, 2005, which has received the assent of the President of India on 28-12-2005. The following amendment was made with retrospective effect from 1-4-1998 : (A) after the proviso, the following provisos shall be inserted and shall be deemed to have been inserted, with effect from 1-4-1998, namely : Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (Hid) or Clause (Hie), as the case may be, of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (Hid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the t assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the prof its computed under Clause (a) or Clause (b) or Clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent, of any sum referred to in Clause (Hie) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme.
Explanation - For the purposes of this clause, 'rate of credit allowable' means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government; (B) after the fourth proviso as so inserted, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1-4-1992, namely.
'Provided also that in case the computation under Clause (a) or Clause (b) or Clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent.
Of (a) any sum referred to in Clause (iiia) or Clause (iiib) or Clause (iiic), as the case may, or (b) any sum referred to in Clause (iiid) or Clause (iiie), as the case may be, of Section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.' (ii) in the Explanation occurring at the end, with effect from the 1st day of April, 1998, (I) in the proviso to clause (books of account), for the word, brackets, figures and letter 'and (iiic)', the brackets, figures, letters and word '(iiic), (iiid) and (Hie)' shall be substituted and shall be deemed to have been substituted; (II) in Clause (baa), in Sub-clause (I), for the word, brackets, figures and letter 'and (iiic)', the brackets, figures, letters and word '(iiic), (iiid) and (iiie)' shall be substituted and shall be deemed to have been substituted.
10. As this amendment was not considered by CIT while directing the assessing officer to recompute the deduction under Section 80HHC, we accordingly direct the assessing officer to give due cognigence to the above amended provision while framing the assessment de novo.
11. The next aspect of the case is what treatment is to be given to the duty drawback received by the assessee. Here also, different views are emerging on the issue. The learned counsel, brought to our notice the decision r of the Gujarat High Court in the case of CIT v. India Gelatine & Chemicals Ltd. ' wherein a view has been taken by the Gujarat High A court that receipts of duty drawback are income derived from industrial undertaking and eligible to deduction under Section 80J. The reason given is that as customs duties and excise duties are admittedly an integral part of the cost of production any receipts by way of reimbursement of such duties are inextricably linked with the cost of production which has to be reflected in the profit and loss account of the assessee. Therefore, duty drawback was "derived from" the industrial undertaking and eligible for deduction under Section 80J of the Act. This is a case for deduction under Section 80J of the Act and not under Section 80HHC. The issue regarding receipt of duty drawback on the raw-material utilized as in-put by the assessee, whether income derived from industrial undertaking so as to be eligible for deduction under Section 80-IB has been examined by the Hon'ble Delhi High Court in the case of CIT v. Ritesh Industries Ltd. , wherein it was held that such duty drawback may constitute profits or gains of the business by virtue of Section 28, but, it cannot be q constituted as profits or gains "derived" from the industrial undertaking for its, immediate and proximate source is not the industrial undertaking but the scheme for duty drawback. On account of duty drawback, business profits may be increased, but so far as profits and gains are concerned, it cannot be said to be "derived" from an industrial undertaking, it will not increas e. It will remain the same. Similar view has been taken in case of CIT v. JB Exports Ltd by the Hon'ble Delhi High Court, wherein decision of Madras High Court in case of CIT v. Jatneel Leathers & Uppers (2000) 246 ITR 974 was followed. Similar view has been taken by the Punjab & Haryana High Court in the case of Nahar Exports Ltd. v. CIT (2006) 288 ITR 494.
12. The issue regarding treatment of interest income while computing deduction under Section 80HHC has been elaborately considered by the Delhi High Court in case of CIT v. Shri Ram Honda Power Equip.
. The provisions of Section 80HHC also provides for deduction of E income "derived from" from export, similarly, sectipn 80-IB also envisages deduction in respect of income derived from industrial undertaking. The words "derived from" have been used in the same spirit in both the sections. We can safely apply the broad principles laid down in case of Shri Ram Honda Power Equip, (supra), to the cases where interest income is claimed as deduction under Section 80-IB of the Act. Broad principles for determining the nature of interest income, as to whether such interest income is "business income" as computed under Sections 28 to 44 of the Act or income from other sources as determined under Section 56 read with Section 57 of the Income Tax Act were laid out. The first category of such interest income was held by the Hon'ble High Court as arising out of parking of surplus fund, such income is to be treated as 'income from other sources'. The second category of cases are those where assessing officer himself treats the interest income as 'income from business', on the plea that such interest income was inextricably linked with the export business. Here we are concerned with first category where assessing officer treats such income as not related to business of exports, but as 'income from other sources'. However, the jurisdictional High Court in such situation have held that these receipts merits separate treatment under Section 56 of the Act which is outside the ring of 'profit and gains from business and profession'.
The court has further provided that to give effect to this position, the assessing officer while computing the profits of the export business will have to remove from the debit side of the Profit & Loss Account, the corresponding interest expenditure that had been "laid out" to earn such income from other sources. Otherwise, this will depress the profit by an amount which is out of reckoning of Section 80HHC, a consequence not intending to be brought about. Following is the relevant observation of the Hon'ble High Court at Para 19 : We are therefore of the view that where surplus funds are parked with the bank and interest is earned thereon it can only be categorized as income from other sources. This receipt merits separate treatment under Section 56 of the Act which is outside the ring of profit and gains from business and profession. It goes entirely out of the reckoning for the purpose of Section 80HHC. To give effect to this position, the assessing officer while computing profits of the export business will have to remove from the debit side of the Profit & Loss Account the corresponding interest expenditure that has been 'laid out' to earn such income from other sources. Otherwise this will depress the profits by an amount which is out of the reckoning of Section 80HHC, a consequence not intended to be brought about.
13. It is quite clear from the above proposition that if the assessee has incurred any expenditure for making the FDRs, interest income of which is brought to tax under the head "Income from other sources', such interest expenditure is to be taken out from the profits of export business, and at the same time such interest expenditure is to be deducted while arriving at net income from interest on bank deposit.
Taking out such Finterest income and interest expenditure out of the Profit & Loss Account prepared for computing export profits, will change such export profit, therefore, assessing officer is to recalculate permissible deduction under Section 80HHC/80-IB with reference to such revised export profits/pro fit of industrial undertaking. On the other hand, such interest expenditure is to be allowed as a deduction while computing net interest income to be taxed under Section 56 as 'income from other sources'.
14. In view of the above discussion we direct the assessing officer to recompute the deduction with reference to the amended provisions/after insertion of second, third, fourth and fifth proviso by the Taxation Laws (Amendment) Act, 2005. With regard to admissibility of duty draw- back for deduction under Section 80-IB, the issue is squarely covered by the decision of Hon'ble Delhi and Punjab & Haryana High Courts in favour of revenue as discussed above. Same analogy can be very safely applied for admissibility of subsidy received from DIC for computing deduction under Sections 80-IB and 80HHC, and can be treated as covered by the decision of Hon'ble Delhi and Punjab & Haryana High Courts in favour of revenue, as discussed above. With regard to allowability deduction on interest, we direct the assessing officer to follow the principles as laid down in case of Shree Ram Honda Power Equip, (supra) as discussed hereinabove. With regard to the amendment brought in by the Taxation Laws (Amendment) Act, 2005, which received the assent of President of India on 28th December, 2005, therefore could not be considered by CIT qin his order dated 30th March, 2005, we direct the assessing officer of recompute the deduction under Section 80HHC in accordance with the amended provisions as discussed hereinabove. With regard to the limited scrutiny by the assessing officer, we do not find any merit in AR's contention for exercise of powers by the CIT under Section 263.
15. In view of the above discussion we are inclined to agree with Id.
DR Shri Rajnish Kumar that there is no fault in the direction issued by the CIT with respect of allowability of claim of deduction on duty drawback and subsidy from DIC under Section 80HHC/80-IB as well as reduction of amount of claim of deduction under Section 80-IB from the eligible profit on which deduction is permissible under Section 80HHC.We thus direct the assessing officer to recompute the deduction under- Section 80HHC and 80-IB keeping in view the verdict of Delhi and Punjab & Haryana High Courts as discussed above. We direct accordingly.
16. In the result, appeal of the assessee is allowed in part as indicated hereinabove.